BILL Holdings, Inc. (BILL) Earnings Call Transcript & Summary

Thank you all for -- again for joining us at the Wolfe FinTech Forum. Again, I'm Darrin Peller, covering payments and processors and IT services for Wolfe Research. Look, really happy to have BILL.com or BILL with us -- change -- changed the name. BILL with us, again, it's a name that we've spent a lot of our time and focus on and really are impressed through with what you guys have been able to accomplish over the years. John comes from San Francisco, San Jose. And really happy to have you with us, John.

Yes. It's great to be here. Thanks.

As many of you know, John is the CFO. We also have Karen from Head of Investor Relations here as well.

John, maybe just kick things off with a quick update on the situation with SVB. I know you guys put a release out, but I know a lot of folks are probably eager to hear what you have to say.

Yes. Given everything going on, it's probably a good place to start. As things unfolded last week, I guess, starting Thursday, we sort of quickly worked to assess the situation, ensure operational continuity, support for customers, troubleshooted payments. I mean, so there's all these things in flight. And we very quickly got up and running with another bank. So we move payments. We established our commitment to customers about honoring payments that were in flight, regardless of what happened with the bank. We inform investors about the big picture view of the implications and all of this happened on Friday, the day that it was announced that the bank had closed. So I felt like we moved quickly to assess the situation and start to take action and the BILL team really came together and consistent with our commitment and our values. We started working quickly really on behalf of customers. And the reason we're able to do that has in large part to do with like the redundancy that we've built, the capabilities we have with the platform. We work with, obviously, multiple global banks. And we do have contingency playbooks. You never know when you're going to need those. So -- and I think it was a good learning on our part that much of what we planned for. We were able to execute quickly. There's still some things in process, but we've been working 24/7 since Thursday to help customers and small businesses through this situation. And then obviously, things changed a lot on Sunday with the announcement that the deposits were going to be made whole. And that obviously eliminated one of the risks that we identified Friday evening around the balance sheet and that sort of thing. So removed that. We filed an 8-K yesterday to confirm that as well. Work continues on the payment front, and we're starting to see progress there. So payments are flowing. There's going to be some delays and things like that for all businesses who are working with Silicon Valley Bank, but it seems like that is now starting to move forward, which is great for customers. We also today put an announcement out both for Silicon Valley Bank customers as well as more broadly SMBs, reinforcing some of our capabilities that might be even more valuable in this environment around our digital wallet capabilities with build balance, our DV capabilities and so forth. So we're getting good traction there. And then -- as we look through the -- this week and whatnot, there's likely some smaller impacts that are still to come, things like for BILL. We had some funds with Silicon Valley Bank that will earn lower float revenue on in March. We have a commercial agreement with Silicon Valley Bank in support of their businesses, that agreement obviously terminates. There's 3,000 to 4,000 customers who are on that platform. From a financial standpoint, it's immaterial to build. It's less than 0.5% of core revenue. And we are working directly with those customers to bring them on to the BILL platform directly to the extent that, that makes sense for them. And I think at the end of the day, we have a very diversified customer base. A small percentage of BILL customers bank with SVB, a small percentage of our TPV flows through SVB. And I think that helps us through this situation, and at the end of the day, we're here to help small businesses and those impacted by the SVB situation.

I mean it sounds like you've been able to transition what you needed to do with your partner, your other partner financial institutions.

Yes. We did that by 11:00 a.m. on Friday. So all flow of funds from that point forward actually went through other financial institutions, and these were existing relationships that were already in place. In fact, where the majority of our volume is, as we support customer transactions, it was not with Silicon Valley bank, that was a small piece of our overall volume.

Okay. Good. I'm glad we got that out of the way first. Look, moving on to the business itself, maybe just give us a quick update. We've had more and more questions over the position of BILL, the competitive landscape. Maybe just give us a sense of your views on how you see the company positioned today versus a few years back, what's your view of their structural going forward now 5 years out?

Yes. Over the last few years, we've expanded the surface area and the capabilities of the platform. We used to be really deep primarily in AP. We've invested behind enhanced AR capabilities. We obviously have added spend management capabilities and card with Divvy, and we further built out our partner ecosystem, both with accountants and financial institutions and direct go-to-market capabilities. At the same time, we've been innovating around payments, and those payment capabilities have helped us really significantly expand monetization more than doubled over the last few years. And so that from a like positioning standpoint, we are one of the companies who created this category, and we have a significant lead scale matters in -- obviously, in the payment space. So customer base diversity, payment volume scale, redundancy systems and obviously, our partner ecosystem is really important. So we're really bullish on where we are positioned, and at this point, we've built nearly a $1 billion business, helping to automate just a portion of the transaction life cycle. So as we step back and look about where do we want to go over the next 3 to 5 years? We really want to continue to expand the footprint of the platform such that we're touching more of the processes that the businesses use to run their financial operations. Over the next 5 years, we want to be the platform that is really being leveraged, integrating with other tools that small businesses use, whether that's an accounting system, an e-commerce system, CRM and really helping drive automation. And for most businesses today, there's still a legacy manual component to what they do, and we're going to work hard over the next 3 to 5 years to try to help them go digital.

There's definitely been still a narrative we've heard from Intuit. We've heard from other companies that are -- whether it's Ramp or Brex or others that talk about doing more account payable software. And so when we think about why you guys have the differentiation you have, what is it about your business you see as staying ahead of the curve?

Well, I think this banking crisis that we're going through now highlight some of how we're different. So we're a trusted partner for SMBs. We have significant scale. Our platform operates sort of agnostic of any bank or any accounting system or any tools that a customer is using. We're able to integrate to all of these solutions with an eye towards making them better, not replacing them. We obviously have many payment solutions. So in a time of acute need, some of our capabilities are going to be much more attractive and in demand from customers. We obviously talked about the digital wallet capabilities in Divvy credit. So I think these things are all coming together combined with our operational rigor and scale to help us even strengthen the lead that we have. If you think about how we view the value creation opportunity, it starts with process automation. We wake up every day worried about how businesses operate and how we can help them transform to create efficiency and go digital from manual legacy systems. As a part of that, we also do payments, but much of the, I think, competitive landscape is focused on the payments piece. And the reality is, we do that because of the other value that we create for SMB. So I think in this environment, we have a significant lead in how businesses leverage our platform. It's that process automation and digital and workflow capabilities that we're going to continue to extend on to further penetrate our small business base.

So I mean, just to be clear, when we think about the competitive landscapes, I mean, have you seen any change in what kind of demand there is from your customers versus competitors? Or is it more of the same, more or less?

Well, I think there's -- if you just step back and look at the size of the market opportunity, there's millions of businesses with employees, tens of millions of sole proprietors who -- a need exists for digital solutions and different ways of doing things. So we haven't seen any material change in the landscape that impacts our business from a metrics or a performance standpoint. The market's big enough for us, we believe, to build a really big business over the long term.

John, when you think about the priorities, you and Rene are spending the most time on and the most financial resources on, can you just touch on how you're prioritizing now?

Yes, I think it comes back to some of the key initiatives that we've laid out previously. Platform ecosystem and payments innovation are kind of the top 3. As we think about the platform, in fiscal '23, our biggest priority is the integration of some of the solutions that we've acquired, Invoice2go, Divvy into a more holistic unified customer experience to where the different solutions and features that we have can be accessed with one look and feel with a single identity log on and things like that. We're making good progress. We also are starting to add capabilities to the platform that are more insights oriented, analytics and insights. So that moves beyond just the financial operations and transactions of a business, which is where we've started, but this is via our Finmark acquisition, which is a planning and insights tool. And it will still be some time before we roll that out broadly, but we're making good progress there. As it relates to the ecosystem, we're starting to add more to our platform as we integrate with financial institutions and accounting firms and whatnot to attach more of our products, things like ad valorem payments and our Divvy card solution and Whatnot. And that will help us further penetrate the customer base of our partners as well as attract new partners. And then on the payments innovation front, we've got, I think, a very successful track record of rolling out new payment products, driving adoption, increasing our share of wallet with customers, and we're going to continue down that path. We've talked recently about working capital solutions. We're in the testing phase of that and seeing some interesting results there, and that gives us, I think, confidence that over the intermediate term, there's a big opportunity in that area as well.

You mentioned the payments monetization, payments products opportunities. A big driver of your growth -- in fact, the payment side of the business has been growing notably faster than the software side for some time, has been more virtual card. It's been more FX cross-border. Can you just remind us where you are now, for example, in virtual card as a percentage of the mix? And if your targets, I think you talked about 5% to 10% of the total volume being on virtual card and 10% to 20% of volume being on cross-border, right? Is that still the target? Anything changed on that front?

No. Those penetration targets are unchanged, and they're -- we established those a couple of years ago. They're informed by the visibility that we have in the payment flows across both customers and suppliers. And so we have a good feel for how many suppliers in the network are merchants and accept card payments or how many AP customers we have that actually do business with suppliers outside of the U.S., and we have some feel for how much of that is FX versus U.S. dollar? So we have good visibility to inform those targets. I think we are still fairly early in the evolution of the business, notwithstanding the expansion that we've had in payment volume and monetization on that over the last few years. If you step back and look at over a multiyear period, we're still very much in the early part of the game versus where I think we'll end up. Now near term, there is beyond the SVB situation, some economic uncertainty and businesses are reacting. So maybe the progress around monetization expansion is less linear in the short term than it has been historically. But it doesn't change anything about our long-term view to further penetrate our share of wallet with customers, roll out new products and expand monetization over time.

Actually, I want to expand on that one more time, though, because I know like last quarter when we talked, you mentioned how maybe there's ways to be more proactive around monetization, whether it's supplier enablement or -- can you give us the examples of how you can be more proactive on that front?

Well, I think in this environment, access to cash to working capital liquidity is really important. So making sure that we're driving awareness of, for example, a real-time payment product such that a supplier who's in need of cash -- and this is irrespective of the Silicon Valley Bank situation. It's more making sure that buyers and suppliers are aware of the capabilities, and we're facilitating adoption of the right products for the right transactions. We're still early in that adoption cycle, and so we'll make sure that as we continue to increasingly treat suppliers as customers, they might not have a subscription fee, but they certainly are involved in the decision-making around what type of transaction -- transaction gets executed between buyer and supplier. That's where we'll find opportunities to increase adoption. With that adoption comes enhanced monetization capabilities and an increase in things like take rate and revenue per transaction.

Yes. So you're trying to be a little bit more proactive now on that front.

That's right.

Invoice2go was a deal you did not too long ago. Obviously, that was more even smaller businesses and AR as well as AP, right?

Yes, that's right.

The yield on that is notably higher and it's gone up, I think, 3x actually in the last year or so, right? If you could just give us a sense of what's happening there.

Yes. Invoice2go, when we acquired the business, had about $25 billion in AR volume and very little payments monetization on that invoice value in part because they had outsourced the payment capabilities to a third party. So one of our first goals was to implement new payment capabilities with leveraging some of the build platform features that we have, and then drive adoption on existing payment flows as well as that invoice value at $25 billion. So I think we're making good progress. We're -- pre-acquisition, they were in the order of magnitude of maybe 20 basis points of monetization. We're a little bit below 100 basis points today, but it's still a small volume. We're early in the penetration cycle, but we've made progress at proving out the the thesis that we had around the opportunity to expand payment monetization. Now the journey around driving adoption and increasing the scale such that it becomes more material to BILL, that's the phase that we're in now.

John, about half of your recent customer adds, I know have been coming on the FI channel also recently, right? So the financial institution partners are bringing in customers into the system. Direct is still probably about half, a little less than half last quarter, whether it's direct or it's through accounting channel, right? Can you help us understand a little more of the model around the FI channel for those that I think were a little confused about it the last couple of quarters?

Sure. The typical relationship with our FI partners is grounded in multiyear contracts with minimum revenue commitments that are derived from an agreed-upon penetration rate of the bank's customer base, whether that's the commercial segment or small business segment more recently. And the vast majority of revenue is subscription revenue. And then the transaction piece is very small today, in part because when we started working with financial institutions, we primarily had the flat rate transaction types, things like ACH and check payments and whatnot. We didn't have ad valorem payments when we first started this financial institution distribution strategy. So more recently, what we've been doing is adding payment capabilities to the white label solution, working with our bank partners to drive adoption. And as we step back and look at today or as of the last quarter, I think our financial institution represented about 4% -- 4% to 5% of revenue. We think over the longer term, that can be a more material percentage in part by driving adoption of some of the ad valorem payment products to increase transaction revenues as a percentage of total; and two, continuing on the journey to drive adoption -- more wide-scale adoption of the platform within the financial institutions. That becomes particularly relevant with a few of the banks where we're addressing their small business segment because there we're talking millions of businesses, not tens of thousands. So I think those 2 things combined give us confidence that over the longer term, it's a really big opportunity and one that's worth investing behind.

Okay. And shifting back to an area, you do have more control over your direct channel. I mean, when you think about pricing opportunities, you don't change your software pricing very often, right? On the core business, on the BILL business, you really try to provide more value that goes with it. But if you could just touch on any opportunities to further monetize software, or for that matter, Invoice2go or Divvy actually would be helpful.

Yes. We think of the overall pricing for our different solutions as part of the like value equation for customers. So we think about the value we're creating first and then how we drive yields and monetization. Second, we have a subscription price increase that is rolling out throughout this fiscal '23. It started in the fall. It will continue through this quarter and that impacts both direct and accounting channel customers. And this is the first time, I think, in a couple of years that we've had a price increase after pretty significant improvements and enhancements to the platform that we think has been a benefit for all customers. And then most of the net effective increase in revenue per customer has been on the transaction side lately. So where we can -- where we can find a balance between subscription and transaction fees, maybe by offering some of our new services in a more modular approach, there's lots of different moving parts that go into our overall revenue per customer. And so we feel like we have lots of levers at our disposal.

You do. Good. Can you touch on profitability and margins? Obviously, in light of the environment we're in, it's even more important than it's been in the past. And so maybe just remind us, first, this year, how do you expect margins to -- expansion to play out throughout this year and some of the puts and takes for the year ahead of us?

Yes. For '23, we're obviously taking advantage of the tailwind associated with the interest rates and float revenue plus moderating the rate of operating expense growth to produce significant increases in non-GAAP net income. We've moved to being free cash flow positive as well, and I think we -- we actually, in the second quarter, the December quarter, fiscal quarter, we were positive from a margin standpoint, excluding the impact of interest rates and whatnot. And we improved our margins ex float by about 10% with our latest estimate. So we're managing through this environment, but we're also investing. So we think given the size of the market opportunity, we don't want to take our eye off of the long-term growth potential. So with the tailwind that comes from interest rates, we're investing in products and solutions that will drive multiyear growth. That multiyear growth is what we're going to look to the increase our ex-flow earnings potential, if you will, such that we want to make sure as interest rates start to come down over the next couple of years or whatever that cycle might look like, that we're not reliant on flows for profitability gains. And so we're going to continue to expand profitability in the near term with the benefit of interest rates and over the intermediate and the longer term based on the organics earning -- earnings power of the business.

So longer term, I mean, you haven't -- excluding interest income, you haven't really called out since your pre-IPO days, I think, a formal long-term margin target.

Yes. We haven't laid out long-term growth or margin targets. At the time of the IPO, I think we said, our long-term operating margin to be 20%. I would view that -- at the time, we viewed that as the floor, not the ceiling. We don't see with the way that we've built the model, the significant improvement that we've made in revenue per customer and gross margins and how we see operating leverage playing out. We don't see structural obstacles that would prevent us from operating at or above, say, 30% margins. But we haven't formally laid out those targets, those multiyear targets, and we'll do that at the first opportunity we have.

Okay. Stock comp is also a hot topic right now. Obviously, a lot of people ask me if it's not an expense, then what is it? And so when thinking about that and your profitability outlook, do you -- do you see yourselves having that under a certain -- as a certain percent of total going forward? And...

Yes, it probably fits in that same category of rolling out the long-term targets. But today, we have an elevated level of stock-based comp in part because of pre-IPO options and RSUs associated with M&A transactions that we've done over the last couple of years. We will grow through that over the next year or 2. And I think coming out the other side, little bit longer term, we think low to mid-teens is probably an appropriate way to think about normalized stock-based comp, absent acquisitions and some of the impacts that are elevating our comp levels today.

Okay. Shifting a bit now more to the macro side and what you're seeing in the market, maybe just touch on how you describe the state of SMB today. I know coming out of last earnings, you were talking about some impact and more reservation of spending by some SMBs and you put that in your guidance. Maybe just a quick update on what you're seeing in the market.

Yes, notwithstanding near-term noise, frankly, that's created by interest rates, inflation, lower spending patterns that we've observed with some of the TPV trends from from SMBs. Our view is that the secular trends are here to stay. Like this is -- most customers when we acquire thousands of customers a quarter, we have 400,000 businesses on our solutions, most of them are doing some of its digital automation, process automation for the very first time. The market hasn't evolved to the point where everybody is just looking to upgrade a solution, rip and replace cycle. So it gives us confidence that as we navigate through the current uncertainty in the market, there's a huge opportunity in the market ahead. And businesses might be a little bit distracted today, separate from the banking issues, as they focus on where they need to invest. Maybe their priorities have changed. Maybe they're a little bit more distracted right now. That's more of the near-term cyclical aspect of the business, but the longer term, I think growth opportunity is intact.

And speaking of cyclicality, what are the areas of the business you'd say are the most sensitive cyclically versus anything else that's more structural?

Well, our business model is grounded in subscription fees and transaction fees. Transaction fees are tethered to the overall level of spend that flows through our platform. To the extent that businesses are going to adjust their total operating expenses, we don't have much control over that. We do influence, though, how much of the transactions and processes and TPV that flows through our platform. So we know there's a direct relationship between the number of payment products that we offer and the share of wallet that we have from customers. The higher the share of wallet, the more of the monetization opportunity we have. We're fairly early in the monetization journey as we talked about. So we've seen some changes in spend patterns primarily around expenses that you would view as more discretionary or more variable than some of the fixed items like your facilities or your benefits or other things like that. So professional services, IT consulting and outsourcing, advertising, these are spend categories that businesses are clearly adjusting. And with that, I think we've seen some changes in our TPV trends as well, but it feels like this is a cycle that we have to work through. We saw TPV on a per customer and maybe overall basis peak in mid-2022, so call it the June 2022 timeframe. That doesn't feel like the right reference point as we get through this macro cycle nor does prepandemic feel like the right reference point. Businesses are a lot -- small businesses are a lot bigger now. They're more financially sound. They're going to start expanding. The question is really when? And that's what we're monitoring closely and making sure that we're there as businesses need us. But it feels like the structural demand drivers, the capabilities of our platform, the trends around digital transformation, those things are all still intact.

You guided for the quarter 2. I think it was a sequential change down by per customer spending of just around 15% or mid-teens.

Yes.

Is that the cyclical elements you're talking about? Or are you seeing something else going on?

No, that's the cyclical. I think those estimates are informed by 2 moving parts. One is normal seasonality, which the March quarter is -- on a per customer basis, typically a lower spend quarter than in December, and there's lots of reasons for that around holidays and e-commerce and other things. And then we tried to capture the trends that we've seen around some of the changes in spend patterns that businesses are making. So as those 2 things combined that I think led to those estimates.

Okay. Divvy interestingly was showing strength, right? You were seeing -- You weren't seeing the same level of cyclical impact as maybe you were seeing on the accounts payables business. Maybe just touch on what the patterns were there. And when we think about the opportunity for that business to keep gaining share and for really the cross-sell opportunity, if you could expand on what you're doing between BILL and Divvy now?

Yes. I'd say, Divvy, the spend has held up well. It's obviously a newer category, spend management, smaller customer base. Larger customers on average than the BILL -- think of the Divvy spending businesses as kind of a mid-market plus for BILL in terms of size. So probably more sophisticated, more financially stable and whatnot. Some of the trends are similar, though. So even though the absolute rate of change in spend, Divvy's held up much much better than BILL, we've seen some paring back of some of the spend categories like advertising, just like we've seen with BILL. But given the smaller customer base, the greater impact that new customers acquired over the last year who are still migrating to the platform and bringing spend on from potentially other solutions. I think that supports the growth that we've seen on the Divvy solution.

And the integration potential you talked about with -- between BILL and Divvy.

Yes, we -- part of the thesis was that this category is so new and most businesses really don't have tools -- software tools that help them drive visibility and control and clarity around some of the card spend. We estimated that about 50% of the BILL customer base could be a candidate from a credit perspective for the Divvy solution. We think there's other noncredit solutions that could address the rest. And we are, I think, very quickly driving integration and preparing for a bigger motion around cross-sell and upsell to the BILL customer base, and we feel good about the opportunity there. It's going to take a little while to play out, but the initial progress that we've seen, demand from customers' feedback, adoption, even without a larger push from a sales perspective, I think it's been really good.

Okay. And then just -- when we think about a quick follow-up around -- a follow-up to the SVB noise. I mean when you think about your investment philosophy now, preserving capital versus laying out capital, M&A, share buybacks, what do you -- can you just give us a sense of what -- how you frame that?

Well, we obviously need to navigate this through this current set of events that are happening. But our priorities really haven't changed. Our #1 capital allocation goal is to invest for growth in the business to penetrate the market. We think of those opportunities through a product lens primarily. What is it that we can do for small businesses? How can we create value? We look at organic and inorganic opportunities. We have a track record there. I think some of what you've seen play out with us through this banking situation is a testament to where we're positioned in the market and how we can create value for businesses. So we're going to keep investing for long-term growth and investing in organic and inorganic opportunities in addition to the buyback that we announced, that's still intact. And -- so nothing has really changed in terms of our priorities. Other than, I think, the market opportunity today is as big as ever. There's probably more inorganic opportunities than there were a year ago, and we're looking at that.

John, one of the areas of differentiation that comes up a lot is your distribution network with the accounting channel with really the banks now as well. Maybe you could just expand and explain that a little more because the accounting channel is an area that we still think is very, very unique. It's something that BILL operates through better than most. Have you seen any change in the direct go-to-market strategy for you guys in terms of customer acquisition?

Yes, the accounting channel has been a foundation for our go-to-market ecosystem and strategy really since the beginning of the business. We don't talk about it as much, but we invest in tools for accounting firms to manage their client relationships. It's not just about the tools and capabilities for end clients, but it's enabling accounting firms and their client advisory service practices to create efficiency, automation and work with more clients. So we're -- essentially, our platform can help improve the ROI for accounting firms. They can serve more clients quicker, more efficiently with fewer people leveraging our platform. So we have a large footprint within the accounting industry, 6,000 firms overall. There's a long way to go in terms of additional penetration within those firms of their clients, and we're continuing to invest in those relationships. We obviously have a partnership with CPA.com, where it's a joint go-to-market motion that helps us drive awareness and adoption within the accounting firms as well.

So when we think about go-to-market for customers -- I mean, I know this came up a little bit last quarter around customer adds, anything changing in the way you're going to approach this going forward? Or do you expect that the same go-to-market strategy, the same status quo?

Well, we think that the demand environment is strong, will continue to be. Maybe there's more distraction for small businesses given the economic cycle that we're in. We saw that play out in terms of lower conversion rates, maybe a longer decision-making cycle, not from a financial standpoint. Our platform is low cost, but maybe from a -- is now the right moment to devote my time to going digital. So we're going to make sure that we adjust our go-to-market capability so that, that funnel is larger, and we're tapping into more of the potential demand that's out there in a time when small businesses might take a little bit longer to decide to adopt.

Okay. Last question, and then we'll wrap it up is, when you think, John, about a year from now and 3 years from now, maybe you and Rene both, what do you want to see accomplish that you would call a success for BILL?

Expanding the platform, further penetrating the huge market opportunity, continuing to drive high retention, repeat usage growth for the business as we continue on this journey of balancing growth and profitability. Those are the things that we're focused on.

Both this year and the next few years?

Yes.

Great. All right. John, thank you very much for joining us. I appreciate it.

Thank you.